Why Medical Insurance Leans On Cheaper Generics

The pharmaceutical industry is crystallizing multiple challenges. They are first of all health, by the effects and the hopes that the drug can raise, and economic, taking into account the weight of health expenditure, of which about a quarter is devoted to health products. The stakes are also political when the drug is the subject of a care by health systems, even ethical when it is a question of allowing access of innovative drugs to the poorest people or countries.

Medicines are therefore the subject of numerous regulations, both national and international, with multiple objectives. It is indeed a question of allowing a dynamic, innovative, well targeted and efficient production, at prices accessible to all, in sufficient quantity and without discontinuity of distribution. In the current organization of healthcare systems, pharmaceutical companies, in particular big pharmas, play a central role through their organizational methods, their industrial and commercial strategies and the pressures they exert permanently through their legal or lobbying actions. The firms have, through this, marked the regulation of the drug sector with their mark and continue to co-construct it: the objectives of this regulation cannot then succeed without them.


To make an efficient pricing analysis on the pharmaceutical market, it is essential to:

  • Compare the therapeutic properties of a new product to those of its competitors (which may be a generic).
  • Compare incremental costs and effectiveness, assess budget impact to determine if the therapeutic benefit of a new product is worth the price offered by the laboratory.
  • Compare the situation in different countries by using this method.

Analytics of Price Policy on Global Basis

By referring to prices negotiated in countries where the regulatory systems differ, the regulator limits excessively large differences for the same product. In Canada, you can see that the preference is strongly set in favor of generic medications – log on to https://ousu.org to discover that the assortment features a wide range of drugs, but the prices are minimal. How does that work? The government and insurance companies encourage savings on the national level, and generically produced meds are the most reliable tool for that.

Therapeutic referencing allows the regulator to focus on innovation while avoiding the explosion of costs. If a new drug is more innovative than the referent, its price is higher. If it is little or not innovative (including generics), its price is lower compared to the benchmark. In both cases, the reference drug sees its price fall, either immediately, in a regulatory manner, or in the longer term, during price renegotiations (as in France) or due to the fall in sales, leading the firms to offer rebates in the United States.

Like the therapeutic referencing, the medico-economic evaluation allows to refine the price of a drug according to its degree of innovation. However, these methods go further, taking into account the impact of drug use on quality of life and / or on public budgets. For this reason, more than for the price, evaluation is frequently used to determine the take-over rate.

Mandatory social protection systems have always sought to control the prices of reimbursable medicines in order to guarantee their sustainability and access to healthcare for the greatest number. The control methods put in place, however, included the need to maintain prices to finance the R&D of new medicines. This objective is at the very heart of the mechanism generally used – negotiation – to determine prices. For the regulator, this is a process limiting the monopoly power of firms on a case-by-case basis. For the latter, it is the guarantee of a turnover accompanied by an insurance of socialized financing of its R&D.

All in all, branded medications on which the industry was based on three levers:

  • The protection of innovations by patents on medicines ensuring that firms have a monopoly position.
  • High and guaranteed prices, combined with aggressive sales techniques in order to sell the maximum number of drugs during the period when they benefit from patent protection.
  • Ongoing innovations, in order to regularly renew the pipeline of branded medications that generates corporate profits.

The regulation of the sector plays a major role on each of these pillars, mainly by the development of international legislation and the maintenance of patent stability or by the financing of innovation through regulation outside the price market. It is therefore naturally with consistency and vehemence that the industry has influenced this regulation. However, despite these efforts, from the mid-1990s, the sustainability of this model is compromised.

Generics and Their Future

Simultaneous expiration of a large number of branded medications: rising requirements, both health and financial, for healthcare systems; drying up of the pipeline linked to the delay in biotechnologies; increasing complexity of the R&D techniques to be implemented; quantitative and qualitative developments in the markets, due to the massive arrival of the countries of the South; etc. One of the characteristics of these events is that a generic drug seems to constitute a plausible response, whether in the form of a plaster or a rampart.

Public regulations adopted regulations on generic drugs tightening the health requirements for obtaining a marketing authorization and introducing criteria of medico-economic efficiency during negotiations. These requirements come at a time during which many patents expire without the low rate of appearance of innovative medicines succeeding in replacing them in the portfolio of companies.

With the loss of patents on the most profitable medicines and the tightening of marketing authorization conditions, the firms hoped to oppose a massive arrival of innovative medicines, making it possible to maintain the profitability of the model. This hope was based on the development of biotechnologies and the prospects for the development of new medicines that they announced. However, these technologies have turned out to be more complex than expected. They have greatly increased R&D costs and, despite the costs incurred, have failed to massively bring new medicines to the market at the right time.

This deficit in innovation, in which no new product compensates for the loss of patents or competition from other products, quickly undermined the profits of firms in the short and medium term. The guarantee of high prices relayed by aggressive sales strategies has also been undermined.

The accumulation of shortcomings and the tightening of regulations have led all stakeholders to explore new models, including that of generics which, at least in the short term, has the dual advantage of reducing the amount of drug expenditure and containing decreases in turnover of companies.

Development of Generics as a Health and Financial Alternative

The financial constraints associated with health imperatives lead compulsory health systems to favor generics. In the countries of the North, the regulation of the drug focuses on the generic while in the countries of the South, the generic policies already in force are reinforced because they allow access to healthcare for populations who would otherwise be deprived of it. While trying by all means to defend their patents, big pharma is resigned to developing new product strategies.

The situation of pharmacists is very different because they have a priori no interest in prescribing generics insofar as their margins increase with the price of drugs. Specific incentives were needed: increasing the margins of pharmacists; the introduction of a sales bonus; the use of penalties penalizing pharmacists who do not apply substitution. Finally, incentives for patients have been put in place, generally relating to the amounts or reimbursement rates. All these measures had the consequence of increasing the market share of generics to the detriment of princeps, reaching on average, in 2019, 52% market share in volume in the top 5 drug markets and 19% in value.

The development of new products can take different forms. The switch (Rx-to-OTC) is a strategy defined as the voluntary transfer of the status of a medicine with compulsory medical prescription (Rx) to that of a medicine with optional prescription (OTC). Switch policies have many advantages for companies, particularly in terms of price, because the price of Over-The-Counter is not fully regulated and the product is paid for by patients. Several laboratories have used this strategy.

Another form of drug development is that of similar drugs, which are medicines which belong to the same therapeutic class as their reference product and which benefit from incremental innovations or minor modifications sufficient not to be considered as generics.

The second category of strategies consists in acquiring medicines protected by patents through M&A operations and alliances. During the 1990s, the major M&A wave in the sector was mainly motivated by the acquisition of patents. An example of this strategy is given by the 2003 acquisition of Pharmacia Corp. by Pfizer for $ 59 billion, motivated in particular by the patent for Celebrex (non-steroidal anti-inflammatory drug).

Big pharmas did not believe in the decline of the branded drugs because they relied on innovations from biotechnology to ensure the renewal of protected medicines. They therefore accompanied the regulators in their evolution towards generics while trying to maintain their positions and counter generic companies in this perspective. Incentives for the development of generics ultimately affected the profits of firms before the arrival of the hoped-for biotechnology medicines.

Generic: Fatality or Opportunity?

The development of generic drugs is a quick and relatively easy response to the difficulties that big pharma is encountering in the market for originators. This strategic choice offers many advantages for companies: generics require relatively low R&D costs (lower than for originators); MAs are simplified, therefore less expensive and faster to obtain; generic production is a way to use excess production capacity and take advantage of the brand effects. This choice also makes it possible to satisfy the cost constraints of compulsory systems. Finally, it gives firms the opportunity to take advantage of the opportunities offered by new regulations and the growth of the market.

In this perspective, all market leaders chose to develop generic medicines, even if they did not do it in the same way or at the same time. To achieve this, several methods are possible, such as development by internal growth, by external growth via M&A or the formation of alliances.

Pfizer’s strategic choices are clearly different. In 2009, Pfizer positioned itself on this market with, on the one hand, the creation of auto-generics (or branded generics), 24 for 7 of its medicines and, on the other hand, with the repurchase of the rights to 39 generics in the United States and 20 in Europe. The development of auto-generics has many advantages, in particular that of being the first on the market, to benefit from an exclusivity period allocated to the first generic (180 days in the United States) and to benefit from a brand effect. Thus, Pfizer put on the market a generic, Sildenafil, of its princeps, the branded Viagra, the patent of which held since 1998 ended in 2013. Fifteen other firms, including big pharma like Novartis-Sandoz, or generators like Teva have also obtained marketing authorizations for generics of Viagra.

The group bought several generators including the Brazilian Teuto Brasileiro and tried to acquire the German Ratiopharm and the Indian Micro Labs. These acquisitions show that Pfizer’s generic production strategy is twofold: to position itself in the western generic markets and to penetrate the markets of emerging countries.

According to CNBC overview, the interest of pharmaceutical companies in the generics market can also be illustrated by the number of M&A operations and alliances involving generic producers, regardless of the size of the companies involved in the operation.

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